No debt, $85/sf, and a $2.4M reserve I think is half of what it needs

Coming from small multifamily this is the part that stops me. My turnover cost on a two bedroom is maybe $2,800 and the unit is back on the market in eleven days. Here a single 6,000 foot tenant leaving costs $360k to $480k to replace and takes a year.

Same business on paper. Completely different animal in how fast a mistake compounds.

What's the capital call language? If your reserve math is right and theirs is wrong, the gap gets filled by asking LPs for more money, and the terms for declining are what decide whether $300k is your maximum exposure or just your opening one. I'd want to know that before I cared about the exit cap.

You're a land person so look at it like land. 78,000 feet on what's probably four to five acres at that interchange, with a parking field. What's the site worth if the building is worth nothing?

Ask for the parking ratio and the acreage. If it's five per thousand you have a lot of asphalt, and asphalt at an interchange in a growing southeast metro has buyers who don't care about office at all. That's your actual floor, and it's more testable than a 7.75 exit cap.

This is a lease-up bet on secondary office stock, and the outcome is decided by one product: net effective rent times square feet absorbed, against total capital in.

The market context cuts both directions. National office vacancy near 18 to 19 percent has been improving modestly, and net absorption in a recent quarter was the strongest in four years. At the same time, the office CMBS delinquency rate reached 12.34 percent in early 2026, an all-time high, and that distress is concentrated in older commodity buildings rather than spread evenly. A large share of the roughly $1.5 trillion of commercial mortgage debt maturing by the end of 2026 sits in office, which will keep forcing sales, restructurings and conversions. So aggregate stabilization and asset-level failure are happening in the same market at the same time.

What that means for your decision: this turns on whether a 1998 four-story at that interchange is next-tier space picking up spillover demand as prime tightens, or obsolete stock competing on price with other obsolete stock. That's answerable with evidence rather than judgment. Get vacancy and asking net effective rents for the four nearest comparable buildings, get tour counts on the subject over the last twelve months, and get the list of leases signed in that submarket in the last year with the square footage and reported concessions.

On the reserve, your $4.5M to $5.2M range uses the right components. Renewal capital on existing tenants is the line most commonly omitted, and with a 3.1 year weighted average lease term nearly all of it lands inside the hold.

No debt at close removes maturity risk and moves the financing question to the year three refinance, where you have no rate or proceeds certainty. Any refinance assumption in the model should be confirmed in writing with an actual lender at the time, and the affiliate leasing commission arrangement is a conflict your own attorney should read the documents on.

$85 a foot reads cheap until I compare rents. Small town office in my area asks $14 gross and sits empty at that. Your building needs $21 to $23 to work. The price per foot only means something next to the rent per foot it can actually get, and I'd want three signed comps at $23 before I believed the deck.

Five year target hold on a building needing 42 months of lease-up is the same as saying they intend to sell into whatever exists in 2031 regardless. What's the extension provision? A lot of these documents give the sponsor one or two one-year extensions at their discretion, which in practice means the hold is seven years and your money is committed for seven.

I'd rather see a ten year structure honestly stated than a five year structure with extensions nobody plans to skip.

1.5 percent on invested capital, not on equity outstanding, is $140k a year regardless of whether the building leases. Over five years that's $700k off a $9.3M raise. Add the 2 percent acquisition fee and the affiliate leasing commissions and the sponsor is paid respectably for a deal that never stabilizes.

I'm not saying that's wrong, fees are how sponsors keep the lights on. I'm saying ask what portion of their compensation depends on the outcome. If it's mostly the promote and they've put real cash in alongside you, that's a different deal than if it's mostly fees.

3.7 percent yield on cost in year one, minus 1.5 percent of asset management, means there's essentially no distribution for a couple of years. I came to this room wanting income. This isn't income, whatever else it is.

Honest reaction: if you believe the thesis, why is a 3.2 percent LP slice the way to express it? You get none of the leasing decisions, all of the outcome, and you pay fees for the privilege.

At $6.6M this is a size where a small group of people who actually know that submarket could buy it directly. That's a different amount of work than you want, @orchard, I know. But the passive version of a lease-up deal is the version where you carry the risk of execution you can't influence.

Updates from asking, since several of you pointed the same direction.

Downtime in the model is eight months on rollovers, and they assume a 65 percent renewal probability. @sextant, you called it.

Reserve breakdown they sent: $1.45M tenant improvements, $310k commissions, $640k building capital including a chiller and a lobby refresh. So renewals on the existing 53,000 feet are carried at essentially nothing. Their answer was that renewals "typically require modest capital." At $20 a foot on say 34,000 feet of renewing space that's $680k they haven't budgeted.

Parking is 4.2 per thousand on 4.6 acres, @arbor. I'm going to price that as land this week.

On the exit, they showed me two sales in that submarket in the last eighteen months, both at $95 to $110 a foot, both buildings above 85 percent leased. So the comps exist for stabilized product. Nothing at 68 percent traded that I can see, which I think is @hollow's point in a different form.

So your real check isn't $300k. It's $300k plus your share of a probable capital call. If the reserve is short by $2M to $2.5M and they raise it pro rata, that's another $65k to $80k from you, and it comes when the deal is going badly.

I'd size the position as though that call already happened and see if I still want it.

WALT is weighted average lease term, the average time left on the leases weighted by how much space each one takes. 3.1 years on this building means the income stream mostly expires inside the hold period.

Is there a number people consider safe? Or is it just "longer than your business plan"?

@rigging, longer than your plan and longer than your loan, roughly.

@orchard, the exit is doing more work than anything else in this model and I'd like to show you how much. Stabilized $900k NOI at 7.75 is $11.6M. At 8.5 it's $10.6M. At 9.25 it's $9.7M, which is your total capitalization. So a 150 basis point move in the exit cap takes the entire deal to zero profit before fees, and secondary office cap rates have moved a great deal more than 150 basis points in the last four years.

Run it the other way too. If stabilized NOI comes in at $780k instead of $900k, which is one 8,000 foot tenant not renewing, then even at 7.75 you're at $10.1M. Two variables you can't control and neither one has much room.

What would make me look again is a lower basis. At $6.6M plus $5M of honest leasing reserve you're in at $150 a foot on a building whose stabilized comps are $95 to $110. That math doesn't work at any exit cap, and that's the number to argue about, not the reserve.

$9.75 a foot of operating expense on a four-story 1998 building with a chiller is optimistic in the southeast. Cooling load runs high, and janitorial pricing has moved a lot in three years. I'd expect $11 to $12.50 fully loaded once you include a day porter and after-hours HVAC that tenants don't reimburse under gross leases.

Call it $1.50 a foot understated. On 78,000 feet that's $117k a year off NOI, which is a third of @orchard's year one number.

@cobalt is right and there's a second piece. Gross leases mean the landlord eats expense growth unless there's a base year stop, and on older suburban buildings the stops are often stale or missing entirely. Ask which of the 53,000 feet has an expense stop and what year it's set to. That single answer moves your NOI more than most of the leasing discussion.

Managing one of these, retention is the whole game. Small office tenants stay if the building is clean, the HVAC works on a Saturday, and someone answers the phone. Half the renewals I've kept were won by responsiveness rather than rent. That means the property management arrangement matters, and if the sponsor's affiliate manages too, ask what they charge and whether it's competitive.

Tenant side data point. My service business renewed last year at 40 percent less space than we had before, same headcount. Everybody I know did some version of that.

So when you look at the 65 percent renewal probability, ask 65 percent of what square footage. A tenant renewing into two thirds of their old footprint is a renewal in the model and a vacancy in reality.

@thatch just named the thing I'd audit hardest. Ask for the last three years of lease transactions in that building with prior and new square footage side by side. If the building has been shrinking through renewals, the 68 percent occupancy is a trend rather than a starting point.

Other due diligence I'd want before writing anything: certified rent roll tied to the tax returns, estoppels from every tenant over 2,000 feet, and the sponsor's full track record in office specifically. Not commercial real estate generally. Office. How many office lease-ups have they finished, and what did the reserves actually cost versus budget. A sponsor whose experience is multifamily doing their first office lease-up is a different risk than the deck implies, and that history is a fair thing to ask for in writing.

Documents questions, in the order I'd ask them.

Does the 6 percent preferred return accrue and compound if unpaid, or does an unpaid year vanish? On a deal with no year one cash flow that distinction is worth real money.

What's the capital call remedy? Pro rata dilution at a stated formula, or a punitive conversion where non-contributing LPs get crammed to a fraction? I've read both in the same month.

Affiliate leasing commissions at 4 percent: is there a cap, and does an independent broker have to co-list? An affiliate paid per signed lease has an incentive to sign leases, which is not identical to signing good leases.

And removal rights. If the sponsor stops performing, what percentage of LP interests can replace the manager, and does @orchard's 3.2 percent have any practical path to joining that percentage? Usually the answer is no. Your own counsel should read all of it, since how these provisions actually operate depends on the state the entity is formed in.

Reading the whole thread, the strategy question is simpler than the numbers. @orchard, your stated approach is buy dirt, wait, spend nothing. This deal is spend a lot, wait, hope somebody buys.

Those are opposite skills. The land floor @arbor raised is the only part of this that's in your language.

What else does $300k buy at the same risk? If a first mortgage position on stabilized product is available in the high single digits with a real equity cushion under you, then an unlevered lease-up bet on secondary office needs to project well into the mid teens to compensate, and this one doesn't obviously do that once @ledger's exit cap sensitivity is applied.

That's the comparison I'd put in front of the sponsor. The question isn't "is this good." It's "why is this better than being the lender to someone else's version of this."

I built the lease-up curve two ways because I can't stop doing this. Reaching 88 percent by month 24 versus month 42 changes cumulative NOI over five years by roughly $900k on my assumptions, and it pushes the refinance out past the sponsor's year three plan.

So the year three refinance and the lease-up timing are the same assumption wearing two hats. If lease-up is slow there's no refinance, and if there's no refinance the reserve has to come from LPs.

Who else is in for the $9.3M? If it's forty retail LPs at $200k each, nobody in that group can force anything, and the sponsor's real accountability is to their own reputation. If there's a single institutional check for $4M with negotiated rights, you're riding alongside someone who read the documents harder than any of us will.

Worth asking whether the sponsor put cash in on the same terms as you, or whether their contribution is the acquisition fee credited back.

I went through the offering language @orchard posted excerpts of in the other room, and the reserve clause is the problem.

It reads that reserves "may be applied to operating shortfalls, capital expenditures, fees payable to the manager and its affiliates, and such other purposes as the manager determines." There's no floor. Nothing requires that $2.4M to be spent on leasing. In a slow year the manager can lawfully pay asset management fees out of the reserve and report the deal as current, and by year three the leasing money is gone and the call comes.

Second clause worth reading twice: a provision allowing the manager to pursue "alternative uses including residential conversion" without LP consent. That sounds like flexibility, and it can be, since obsolete office is being refurbished into apartments all over. It's also a completely different business plan with a different capital requirement and a longer timeline than five years, approved in advance by you.

Ask for a minimum leasing reserve covenant. If they won't add one, that tells you what the $2.4M is for.

@fathom that clause is how I got burned from the other side. I was doing buildout for a tenant in a half empty suburban building and the landlord's TI funding stopped mid job. Tenant lawyered up, took occupancy under protest, and I ate two months. Landlord's reserve had been spent on operating shortfall.

A landlord who can't fund TI on a signed lease loses the tenant and the reputation. Brokers stop touring the building within a quarter.

Basic question I'd have been too shy to ask. If the building never gets to 88 percent and never sells, what happens to @orchard's $300k? Does the partnership just sit there for fifteen years? Is there any way out other than a sale?

@compass, from what I've read the usual answer is no, there's no exit until the sponsor creates one, and any transfer of your interest normally needs manager consent.

What I'd actually rather do is look for the loan on a building like this instead of the equity. Half the distress right now is buildings whose debt matured and won't refinance, and someone owns that paper. Buying a note at a discount on a building you'd be happy to end up owning seems more sensible to me than being third in line behind a lender and a sponsor. I'm still mostly confused about how you find those, though.

Pass. $85 a foot is not cheap when the honest all-in is $150 and stabilized comps are $110. Nothing else in the thread matters after @ledger's math.

Before passing entirely I'd spend $6k on a conversion feasibility study, because that changes what the downside looks like. Four stories, 1998, 19,500 feet per floor. The question is depth from window line to core. Anything past about 30 feet can't be a bedroom, and if the plate is 90 feet deep with a center core you have a lot of dark interior that becomes corridor and storage in a residential layout.

If it converts, @arbor's land floor gets replaced by a higher floor and the office lease-up becomes the upside case rather than the whole thesis. If it doesn't convert, you're looking at a building whose only future is office in a submarket that has too much office.

Most of this thread was over my head when I started reading it and I think I follow the shape now. The price per foot looked like the deal, and it turned out the leasing capital was the deal.

Question I'm left with: is the reserve being short by half a red flag about this sponsor, or is that just how every office lease-up deck is written and the job is to correct it yourself?